Economy Still on Shaky Grounds

Sun. July 13, 2008; Posted: 10:58 PM

(RTTNews) - Last week's economic reports offered some respite from the spate of negative economic readings the markets have been witnessing since the onset of the subprime mortgage markets crisis and its fallouts. The weekly claims for unemployment benefits declined sharply in the recent reporting week. Retail sales reported by the nation's retailers offered comfort, as they have received a fresh lease of life from the fiscal stimulus package. Discount retailers and warehouse clubs have been the primary beneficiaries of the tax rebate checks, while most other categories of retailers reported lackluster results.

The trade gap report of the Commerce Department showed that the trade deficit narrowed to $59.8 billion, with the improvement more pronounced in the real trade deficit, which has been adjusted for inflation and is used for GDP calculations. The narrower deficit reflected a cool-off in the energy pool, as higher prices reduced the appetite for imported oil. According to estimates by Wachovia Securities, trade could add 2 percentage points to second quarter real GDP if the real trade gap remains at its current level next month.

Additionally, the University of Michigan's consumer sentiment index for July showed its first gain, although a small one.

The National Association of Realtors reported that the pending home sales index for May declined a worse-than-expected 4.7% to 84.7 in May, reversing the upwardly revised 7.1% growth in the previous month. The steepest decline was in the South, where the index declined by 7.1%. Meanwhile, the Federal Reserve's consumer credit report showed that consumer credit increased at an annual rate of 3.5% or $7.8 billion in May to $2.57 trillion. Economists had expected a $7 billion increase for the month. Revolving and non-revolving credit increased 7% and 1.2%, respectively.

The Commerce Department reported that wholesale inventories at the end of May rose a bigger-than-expected 0.8% from the previous month. Inventories increased 8.7% from a year-ago, rendering the wholesale inventories to sales ratio at 1.08 in May compared to 1.13 in the year-ago period.

With the markets roiled by worries over financial firms, Federal Reserve Chairman Ben Bernanke was forced to calm the markets by communicating last week the central bank's willingness to extend the PDCF beyond the year-end of the current unusual and exigent circumstances continue to prevail. The reinforcement of support came about amid rumors that the nation's two government-sponsored mortgage financing agencies Freddie Mac (FRE | Quote | Chart | News | PowerRating) and Fannie Mae (FNM | Quote | Chart | News | PowerRating) were on the brink of failure.

The Federal Reserve announced Sunday that it has authorized the Federal Reserve Bank of New York to lend to the two companies, if warranted, at the primary credit rate. The loan would be collateralized by the U.S. government and federal agency securities, and is intended to supplement the Treasury's existing lending authority.

Additionally, Treasury Secretary Henry Paulson announced a three-part plan, which envisages temporarily increasing the line of credit the two Government Sponsored Enterprises - GSE have with the Treasury, authorizing the Treasury to purchase equity in either of the two GSEs and the strengthening of GSE regulatory reform legislations by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards.

The unfolding week's economic calendar is heavily loaded, with many first-tier economic reports due out in the week. Among the key reports scheduled to be released during the week are the Commerce Department's retail sales report for June, the Labor Department's consumer price index for June, the housing starts report for June and the Federal Reserve's industrial production report for June. Additionally, market attention may also rest on the Labor Department's producer price inflation report for June, the results of the July manufacturing surveys of the New York Fed and the Philadelphia Federal Reserve, National Association of Homebuilders' housing market index for July and the minutes of the June Federal Open Market Committee meeting.

Some degree of importance may also be attached to the business inventories report of the Commerce Department, the regularly scheduled weekly crude oil inventories and jobless claims reports.

Economists are optimistic about retail sales performance for June. Weakness in auto sales may be offset to some extent by a rebound in the sales of electronics and home improvement products. However, economists expect the strength in retail sales to be short-lived as a result of which they foresee a drastic pullback in consumer spending late this year when the effect of the stimulus package fades.

The rising fuel prices are likely to exert upward pressure on the headline consumer price inflation for June. However, Wachovia Securities is of the view that the core consumer price growth may have remained muted, as softer motor vehicle prices, apparel and shelter costs help offset increases in medical care and airline tickets. The implication this development may have on interest rates is that the Fed will remain in a 'hold' mode for the remainder of the year. Nevertheless, as inflation expectations rise, the Fed may lean towards tightening.

Housing starts are likely to fall further in June, although the rate of decline is expected to slow. The still tight credit conditions, increasing foreclosures and a sluggish economy are likely to lengthen the housing market recovery. However, housing is expected to become less of a drag on growth as the year progresses.

Monday

There are no significant economic reports due out on Monday.

Tuesday

The results of the New York Federal Reserve's empire state manufacturing survey, which elicits response from 200 manufacturing executives in New York state, is slated to be released at 8:30 AM ET on Tuesday. The headline general business conditions index for July is expected to improve to -4.

The general business conditions index for June fell 5 points to -8.7 points. Economists had expected the index to improve to -2.4 from the May reading of -3.2.

The indexes of new orders, shipments and unfilled orders were negative and lower than their May levels. Notwithstanding a small retreat, the prices paid index remained at elevated levels. The employment indexes remained around zero. Meanwhile, the future general business rose only slightly from the depressed levels a month-ago.

The U.S. Labor Department is scheduled to release a report on the producer price index for May at 8:30 AM ET on Tuesday. The index measures the average change over time in the prices received by domestic producers of goods and services. Economists expect the headline index for June show 1.3% growth and the core reading to show 0.3% growth.

Producer prices for May showed a 1.4% increase, while the core producer price index increased 0.2%. Economists had expected the headline index to show 1% growth and the core reading to show 0.2% growth.

Food prices rose 0.8%, while energy prices rebounded to show 4.9% growth. On a year-over-year basis, the producer price index rose an unadjusted 7.2%.

Retail sales of food and retail companies with one or more establishments that sell merchandise and associated serviced to final consumers are slated to be released at 8:30 AM ET on Tuesday. Economists estimate 0.3% growth in the retail sales for June, while they estimate a 0.8% increase in the retail sales, excluding autos.

Retail sales rose a better-than-expected 1% in May, with the increase coming in ahead of the expected increase of 0.5%. Year-over-year, retail sales were up 2.5%. Sales, excluding autos, climbed 1.2%, faster than the 1% rate in the previous month and the 0.7% rate expected by economists. Sales at motor vehicle & part dealers rose 0.3% compared to the previous month, but it declined 7% from the year-ago period.

Sales at electronics & appliance stores and building material & garden equipment & supplies dealers rose at a slower rate of 0.7%. On the other hand, gasoline station sales climbed 2.6%, significantly faster than the 0.2% growth witnessed in the previous month.

The Commerce Department is scheduled to release its business inventories report for May at 10 AM ET on Tuesday. The report summarizes the results from the monthly retail trade, wholesale trade and factory goods orders surveys. The report is expected to show a 0.5% increase in business inventories for the month.

Business inventories at the end of April were up 0.5% compared to the previous month, while sales of businesses, including distributive trade sales and manufacturers' shipments climbed 1.4%. Accordingly, the total business inventories to sales ratio at the end of April was 1.25 compared to 1.27 in the year-ago period.

Wednesday

The consumer price index for June is scheduled to be released at 8:30 AM ET on Wednesday. The index is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The consensus estimates call for a 0.7% increase in the headline consumer price index and a 0.2% rise in the core consumer price index that excludes food and energy.

In May, consumer prices rose 0.6% in May, faster than the expected increase of 0.5%. The retail price inflation represented deterioration from the 0.2% rate in April and represented the fastest rate of increase since November 2007.

The core reading that excludes the volatile components, namely food and energy, showed a 0.2% increase, in-line with expectations. In April, the core reading had showed a 0.1% increase.

Food prices rose 0.3% in May compared to a 0.9% increase in the previous month, while apparel prices fell 0.3%, reversing the 0.5% gain in April. However, transportation prices rose 2% in May compared to a 0.7% decline in April. The growth in the prices of housing was 0.5% in May, faster than the 0.3% growth in the previous month.

The Treasury Department is due to release a report on the flows of financial instruments into and out of the U.S. for May at 9 AM ET on Wednesday.

The industrial production report of the Federal Reserve is due out at 9:15 AM ET on the same day. Economists estimate the industrial production for June to show 0.2% growth, while capacity utilization is expected to come in at 79.4%.

In May, industrial production fell 0.2% following a 0.7% decline in April. The manufacturing output remained unchanged and mining output edged up 0.1%, while the output of utilities declined 1.8%. Manufacturing output was aided by a small lift in the production of motor vehicles and part. Excluding the category, manufacturing output was down 0.1% in the month. The rate of capacity utilization eased 0.2 percentage points to 79.4% in May, down 1.6 percentage points below its average for 1972-2007.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET on Wednesday.

Crude oil stockpiles declined by 5.9 million barrels in the week ended July 4th to 293.9 million barrels. Inventories are currently below the lower boundary of the average range for this time of the year.

On the other hand, gasoline inventories rose by 0.9 million barrels and distillate fuel stockpiles rose by 1.8 million barrels. Refinery capacity averaged 89.1% over the four-weeks ended July 4th compared to 88.9% in the previous week.

The National Association of Homebuilders' is scheduled to release the results of their survey on homebuilders' confidence on Wednesday.

In June, the association's housing market index declined to 18, matching the record low reached in December 2007. The indexes gauging current sales conditions and sales expectations for the next six months remained unchanged at 17 and 28, respectively. The index of prospective buyers dipped a point to 17. On the same day, the Federal Reserve is scheduled to release the minutes of its two-day meeting on June 24th and 25th at 2 PM ET.

At its June meeting, the Fed decided to maintain rates unchanged at 2% after implementing a series of interest rate cuts since August 2007 in reaction to the subprime mortgage market crisis.

The June Fed meeting's policy statement offered little comfort to the Street. While acknowledging that the economic environment is fraught with risk, the central bank did not delve much into actions that could be taken to help the economy emerge out of the woods. The Fed is of the view that inflation will moderate later this year and next, though believing that the upside risks to inflation and inflation expectations have increased. The fact that the Fed has changed its timeline for the moderation in inflation from 'the coming quarters' is perceived as a sort of confession that the central bank will not act hastily even inflation surges in the coming months due to adverse base year effects.

On growth, the apex body commented that the downside risks to growth appear to have diminished somewhat. Commenting on the Fed action, Lehman Brothers said the Fed is trying to buy some time in the face of major conflicting signals.

Thursday

A report on housing starts, which refer to the number of privately-owned new homes on which construction has been started over some period, and building permits, which is the number of permits issued for new housing units each month, is slated to be released at 8:30 AM ET on Thursday. Economists estimate housing starts for May of 968,000 units and building permits of 970,000.

Housing starts declined 3.3% in May to a seasonally adjusted annual rate of 975,000 units from a revised rate of 1.008 million units for April. Economists had estimated housing starts to come in at an annual rate of 980,000 units compared to the initially reported reading of 1.032 million units.

On a year-over-year basis, housing starts declined 32.1%. Building permits, a leading indicator to housing starts, declined at a monthly rate of 1.3%, but they were down at a year-over-year rate of 36.3% to 969,000.

The Labor Department is due to release its customary weekly jobless claims report at 8:30 AM ET on Thursday.

Initial jobless claims dropped to 346,000 for the week ended July 5. This was down 58,000 from the previous week's revised figure. The announcement came as a surprise to most economists, who had generally expected a mild increase for the week.

Continuing claims, which measures the number of people receiving ongoing unemployment help, edged up for the week ended June 28, the most recent week for which the government has data. The measure was up 91,000 to a level of 3.2 million. Jobless claims rose to 404,000 in the week ended June 28th from the previous week's revised figure of 388,000. Economists had been expecting jobless claims to edge up to 385,000 from the 384,000 originally reported for the previous week.

The results of the Philadelphia Federal Reserve's manufacturing survey are due out at 10 AM ET on Thursday. Economists expect the diffusion index of current activity to show a reading of -12 for July, an improvement over the previous month's -15.2.

The general business activity index, an indicator of manufacturing activity in the Mid-Atlantic region, declined to -17.1 in June from -15.6 in May, marking the seventh straight month of contraction. While the new orders index fell 8.7 points to -12.4, the backlog of orders index, though up 6.5 points, remained negative at -12.5. The employment index declined 6 points to -6.9. On a more negative note, the 6-month outlook index fell to 21.3.

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